Pharmacy Acquisitions and Bridge Loans in Nebraska

By Brad MacLiver
Authorship and profile at Google


With the changes in the NE pharmacy industry independent drug store owners, small and regional pharmacy chains in Nebraska, and pharmacy equity investment groups are acquiring pharmacies so they can gain a larger competitive footprint in a geographic area. There could be opportunities during the acquisition phase of the business expansion that require action which is faster than the traditional funding process.
                        
Bridge Loans are a short-term financing option that can be used while waiting for permanent financing, or while the next stage of financing to be obtained. Bridge loans provide funding to "bridge" the gap between a company’s current needs and their long term financing requirements.  Permanent financing is generally used to "take out," or pay back, the bridge loan.

One of the characteristics of a bridge loan is that they can close quickly, which in turn allows a company to capitalize on a timely business opportunity, or acquisition. The quick access to money can also allow a business the chance to avoid penalties, bankruptcy, or other temporary problems. If longer term issues need to be dealt with, this “transitional financing” provides the company time until longer term financing can be secured.

Another characteristic of bridge loans is that the process usually requires less documentation than conventional financing. Bridge loan lenders don’t usually have the same government regulations to adhere to, so they tend to have more flexibility in their lending criteria and the documentation they require. However, less documentation does not mean they won’t perform due diligence to have a comfort level with the transaction before they fund.

Examples of using Bridge Loans in Pharmacy Transactions in NE:

1. An independent Nebraska pharmacy owner learns of health issues and decides to quickly sell the family owned pharmacy to an employee or local competitor. Traditional financing for the NE pharmacy buyer may require a time line that is not acceptable when considering the circumstances. A bridge loan can be used to quickly accomplish the transaction.

2. A small pharmacy chain needs $1 million to expand their business. They have 3 new equity investors who will be investing in the firm over the next 6 months, but at different intervals. However, the business has opportunities which require action sooner than 6 months. The quick closing bridge loan allows the Nebraska pharmacy chain access to the needed funds so they can complete their expansion and increase profits. Money from the 3 new equity investors will pay off the bridge loan.

3. A NE pharmacy owner in a leased location has an opportunity to quickly acquire a commercial property that would be a great pharmacy location, but the property is in disrepair. A bridge loan provides the needed funds to acquire and rehab of the property and once that is complete conventional long term financing can be obtained.

4. A pharmacy group developing new Nebraska pharmacy locations can receive bridge loan funding to get through the permitting process of a project when conventional financing isn’t available at this early stage due to there is still too much risk. A bridge loan allows the project to move into the construction phase and then qualify for other forms of financing.

5. When a pharmacy is owned by two or more partners and one of the partners is ready to exit the business, a bridge loan can help ensure the cash flow and uninterrupted operation of the business during the partner buyout.

6. Real estate, or equipment bought at auction may have a narrow window for closing the deal and timing of traditional financing would keep the buyer from proceeding with the opportunity. Benefits of a bridge loan will permit the Nebraska pharmacy owner to quickly respond to the opportunity.

When there are business opportunities, buying NE pharmacies, selling pharmacies, quick deadlines, an old loan maturing before a new loan can be put in place, funding needs during the permit, planning, or evaluating stages, etc., bridge loans can be an essential financial tool.

Tips regarding NE pharmacy bridge loans:                        

1. Bridge loans are quick to obtain, but quick to expire.

2. A bridge loan is similar to a hard money loan and the terms are often used interchangeably in conversations. Both are short-term, higher interest rate, non-standard loans, but in some circles hard money refers to the lending source and a bridge loan refers to the duration of the loan.

3. Due to the fact that bridge loans usually come with higher interest rates than traditional financing a larger down payment, they have a lower Loan to Value (LTV) and a lower level of risk.  They also provide an opportunity for lower interest rates.

4. The shorter time period of bridge loans borrowers means that borrowers will need to be aware that fees for valuations, legal, dues diligence, etc., will be amortized over a shorter time period when compared to traditional financing transactions.

Take note that the types of deals requiring a bridge loan may be considered speculative in nature, or they may have higher risk factors. Because of this, many banks do not offer bridge loans. They must meet government regulations and need to justify their lending practices as well. Riskier bridge loans typically don't fall within the lending parameters of many banks. Therefore, most bridge loans will come from private investment firms.  You should consult a company that has access to a number of funding sources who provide bridge loans.

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Acceleration Clauses in Commercial Leases and Pharmacy Business Loans in Nebraska

By Brad MacLiver
Authorship and profile at Google


A provision of many NE pharmacy business loans and commercial leases is an acceleration clause. The acceleration clause in the loan/lease agreements allows the lender to accelerate their collection of payments contingent on an event occurring. These events may include lack of payment by the borrower, failure to keep the property adequately insured, failing to pay tax assessments, not maintaining the property, selling the property/asset, etc.

Lenders look at the acceleration clause as an important tool in their business loan and commercial lease programs. Lease and loan documents might not address the foreclosure of a property or repossession of an asset specifically. This is where the acceleration clause comes into effect. Without the acceleration clause, the lender would only be permitted to foreclose on one missed payment at a time. By having the acceleration clause, lenders can demand immediate and full payment of all remaining balances and fees despite whatever event kicks it into gear.

The pharmacy business loan or lease documents provided to the Nebraska pharmacy owner will describe the rights, conditions, and obligations relevant to the acceleration clause. When the pharmacy owner (the borrower) doesn’t meet their obligations then the loan or lease goes into default. A payment that is even one day late can cause a default. Due to this, pharmacy business loans and commercial lease documents should be thoroughly read and understood before signing.

Tips:
1. If a Nebraska pharmacy’s slowing cash flow is going to cause a business loan default, but the pharmacy owner has additional unencumbered assets they may be able to negotiate with the lender by offering additional collateral.

2. If a pharmacy can catch up on their payments they can reinstate the business loan before the acceleration starts.

3. States have different rules requiring notification of an acceleration clause being exercised. Pharmacy owners in NE should understand the laws in the state where they operate. Lack of knowledge is not an excuse.
                                 
4. When an acceleration clause is exercised on a commercial lease, there is the possibility the landlord cannot collect rent from both the defaulting tenant and a new tenant at the same time. To save themselves some money, Nebraska pharmacy owners should help the process by assisting the landlord re-lease the property. However, please note, should the pharmacy be in the process of being sold and the files and inventory moved to a competitor’s location, the pharmacy buyer will require restrictions in the Purchase and Sale Agreement  that the new tenant cannot be another pharmacy in Nebraska.

5. Lenders prefer not to have to go through the foreclosure process, so if your pharmacy is headed in that direction start talking with the lender about finding a solution. Communication with the lender is a good thing.

6. Some NE pharmacy business loans and commercial leases require a “personal” guarantee from the business owner. This means that the business owner’s personal assets and credit will become involved in the event of a default. The “corporate” status of the business will not keep the lender from seizing the personal assets.

When considering financing a Nebraska pharmacy for acquisition, or expansion, due diligence and understanding of all aspects of the transaction should be considered. Using the services of a pharmacy industry expert to guide a pharmacy owner through the maze of details will benefit the NE pharmacy owner in making the best business decision.

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Current Market Conditions: Nebraska Pharmacy Industry

By Brad MacLiver
Authorship and profile at Google


Currently there are a number of factors that are impacting the current market conditions of the U.S. pharmacy industry. These factors are affecting the pharmacy business valuations of pharmacies in NE and drug stores all across the U.S.

Local demographics:

The valuation process also includes local market conditions and local demographics. Smaller communities have less growth potential and with the declining profits a buyer will need to purchase at a lower value because they will have to service the debt from a business loan and still try to make a living. The same is true for communities that have lost population due to economic conditions, or have a high rate of unemployment. Fewer people, or fewer customers with the ability to purchase, will mean fewer sales and less chance of any substantial improvement in the near term. This has the result of lower pharmacy business values.

Nebraska Pharmacists Shortage:

Pharmacies across the country have had difficulties in finding pharmacists.  This shortage of pharmacists in Nebraska not only affects employee opportunities it also affects the number of potential independent buyers. 

Fewer Buyers:

There are not as many corporate buyers as well. Some of the largest pharmacy chains have been purchased and consolidated in the pharmacy industry roll up. Many smaller chains have run into financial difficulties and have stopped their expansion. It is more difficult to drive a price higher when there are fewer willing, or capable, to purchase.

Current Market Conditions Requires Industry Roll-up:

It is necessary to consolidate the pharmacy industry to get more traffic into a single store.  Due to simple economics, when any business has a reduction in profits they are less attractive to a buyer and pharmacy business values drop in Nebraska. There are many factors contributing to the downward pressure of NE pharmacy values and there is not any expectation of a turn around. Pharmacy owners should let themselves be fooled by inexperienced Brokers who makes claims of grand outcomes while overstating pharmacy business values, which not based on realistic market conditions.

With the consolidation of the pharmacy industry in Nebraska that has been happening for several years, many new brokers have entered the market to broker pharmacy acquisitions. Most brokers do not have pharmacy related experience, nor do they use current market conditions when they value a pharmacy. Most are using simple accounting formulas that hold no sound reasoning for the value when faced with current pharmacy market conditions. Due to this many brokers are valuing Nebraska pharmacies 2 to 3 times more than what the market is really willing to pay. Any inexperienced person can quote a high value to capture a listing.  However, that does not mean the over inflated asking price is what the business will actually sell for.

Mail Order:

Some insurance companies are classifying many of their pharmacy patients as “long-term medications".  These patients are required to only purchase their medications from mail order pharmacy companies who provide products at lower prices. This results in local pharmacies not only missing out on prescription sales, but front-end sales will also decline since the customer is not entering the store. Pharmacy mail order sales have now surpassed sales from independent retail NE pharmacies.

Choose a firm that provides pharmacy business valuations based on real market conditions and does not use a simple formula for calculating the value of a pharmacy. Complex methods are used to derive the value of a pharmacy.

It is best to use a company that specializes in Nebraska pharmacy and has extensive and current industry data.  Consult with pharmacy specialists who have been working in the pharmacy industry for long enough to have an excellent reputation and extensive pharmacy experience.  A company with good credentials possesses large amounts of national data.  The largest financial institutions, national chain pharmacies, regional pharmacy chains, independently owned drug stores, and pharmacy equity investment groups use the services of companies fitting this description.

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